I.H.M , DEHRADUNI.H.M , DEHRADUN

ACCOUNTANCYACCOUNTANCY

TOPIC -: BANKTOPIC -: BANKRECONCILIATION STATEMENTRECONCILIATION STATEMENT

Notes by-:Notes by-:

G.K SawhneyG.K Sawhney

78951909507895190950

MEANINGMEANING

A businessman generally opens a current A businessman generally opens a current account with a bank. The bank column of a account with a bank. The bank column of a cash book is used for making entries regarding cash book is used for making entries regarding deposited and withdrawals in this account. On deposited and withdrawals in this account. On the other hand, the bank also maintains the the other hand, the bank also maintains the customer’s account in its books. A copy of this customer’s account in its books. A copy of this account, it submits to the customer from time account, it submits to the customer from time to time. The account so submitted by the bank to time. The account so submitted by the bank of the customer is known as the bank pass of the customer is known as the bank pass book or bank statement. Cont..book or bank statement. Cont..

When money or cheque is deposited by the When money or cheque is deposited by the customer into the bank account, the customer customer into the bank account, the customer debits the bank account while the bank credits debits the bank account while the bank credits the customer’s account. Similarly, when the customer’s account. Similarly, when money is withdrawn from the bank, the money is withdrawn from the bank, the customer credits the bank account while bank customer credits the bank account while bank debits the customer’s account. debits the customer’s account.

DEFINITION OF BANK DEFINITION OF BANK RECONCILIATION STATEMENT RECONCILIATION STATEMENT

According to According to PatilPatil, “ Bank reconciliation , “ Bank reconciliation statement is a statement prepared mainly to statement is a statement prepared mainly to reconcile the difference between the ‘Bank reconcile the difference between the ‘Bank Balance’ shown by the cash book and pass Balance’ shown by the cash book and pass book.”book.”

According to William Pickles, “Generally a According to William Pickles, “Generally a statement is prepared to show the effect of statement is prepared to show the effect of unpresented and uncredited cheques. Such unpresented and uncredited cheques. Such statement is known as bank reconciliation statement is known as bank reconciliation statement.”statement.”

CAUSES OF DIFFERENCE CAUSES OF DIFFERENCE BETWEEN CASH BOOK AND BETWEEN CASH BOOK AND

PASS BOOKPASS BOOK The following are the causes of difference between the The following are the causes of difference between the

balance as shown by the bank pass book and balance as shown balance as shown by the bank pass book and balance as shown by the cash book.by the cash book.

1. 1. Cheque issued but not yet presented for payment:Cheque issued but not yet presented for payment: When When cheque is issued to the creditor in payment of his dues, it is cheque is issued to the creditor in payment of his dues, it is immediately recorded in the cash book in the bank column. If immediately recorded in the cash book in the bank column. If the cheque is not presented for payment in the bank, the bank the cheque is not presented for payment in the bank, the bank will not record in the firm’s account. Generally, there is a time will not record in the firm’s account. Generally, there is a time lag between the issue of a cheque and its presentation to the lag between the issue of a cheque and its presentation to the bank. Thus, until the cheques are presented for payment, the bank. Thus, until the cheques are presented for payment, the cash book will show lesser balance in comparison. cash book will show lesser balance in comparison.

2. 2. Cheques paid into bank for collection but not Cheques paid into bank for collection but not yet credited by the bank: yet credited by the bank: A trader receives A trader receives from time to time cheques, drafts, etc. from its from time to time cheques, drafts, etc. from its customers and he sends them to its bankers for customers and he sends them to its bankers for collection. The trader debit bank column of collection. The trader debit bank column of cash book as soon as he deposited cheques, cash book as soon as he deposited cheques, drafts etc. with the bank for collection but the drafts etc. with the bank for collection but the bank credit’s the trader’s account only after bank credit’s the trader’s account only after these cheques have been collected. The these cheques have been collected. The collection generally takes a few days. It results collection generally takes a few days. It results in bank balance as per cash book higher than in bank balance as per cash book higher than the balance as per pass book. the balance as per pass book.

3. 3. Cheques paid into bank for collection but Cheques paid into bank for collection but dishonoured by the bank:dishonoured by the bank: Sometimes, a Sometimes, a cheque deposited into bank is dishonoured. It cheque deposited into bank is dishonoured. It has the same effect as a cheque deposited but has the same effect as a cheque deposited but not yet credited.not yet credited.

4. 4. Interest allowed by the bank:Interest allowed by the bank: When bank When bank alow interest to a cutomer for deposits, it will alow interest to a cutomer for deposits, it will credit customer’s account and his bank balance credit customer’s account and his bank balance will increase. But the customer is not making will increase. But the customer is not making the entry in the cash book simultaneously till the entry in the cash book simultaneously till he knows the fact, therefore, the balance differ. he knows the fact, therefore, the balance differ. Thus, the balance shown in cash book is less Thus, the balance shown in cash book is less than the balance shown in the cash book.than the balance shown in the cash book.

5. 5. Interest and dividend collected by the bank:Interest and dividend collected by the bank: A banker may receive amounts due to te A banker may receive amounts due to te customer by way of dividends, interest etc. customer by way of dividends, interest etc. directly from the persons on account of directly from the persons on account of standing instructions of the customer to such standing instructions of the customer to such persons. The bank credits the account of the persons. The bank credits the account of the customer for such collection as soon as it gets customer for such collection as soon as it gets such payments. But same will be entered in the such payments. But same will be entered in the cash book only when customer receives the cash book only when customer receives the statement fro the bank. So long, the balance statement fro the bank. So long, the balance shown in the cash book is less than the balance shown in the cash book is less than the balance shown by the pass book. shown by the pass book.

6. 6. Bank charges and commission charged by Bank charges and commission charged by the bank:the bank: The bank charges by way of The bank charges by way of incidental charges, commission, collection incidental charges, commission, collection charges etc. from its customers for the services charges etc. from its customers for the services it renders to the customer from time to time. it renders to the customer from time to time. The bank debits the customer’s account as The bank debits the customer’s account as soon as it renders such a service and this soon as it renders such a service and this reduce the bank balance. But the customer will reduce the bank balance. But the customer will know such charges only when he receives a know such charges only when he receives a statement of account from the bank, until then, statement of account from the bank, until then, bank balance as per pass book will be less than bank balance as per pass book will be less than bank balance as per cash book. bank balance as per cash book.

7. 7. Interest on bank overdraft:Interest on bank overdraft: When a trader is When a trader is allowed by the bank to withdraw more than his allowed by the bank to withdraw more than his deposits in the account, the excess withdrawal deposits in the account, the excess withdrawal is known as “overdraft”. The bank charges is known as “overdraft”. The bank charges interest on overdrafts and debits the interest on overdrafts and debits the customer’s account with these charges. But customer’s account with these charges. But the customer will record this in the cash book the customer will record this in the cash book either on receiving intimation from the bank in either on receiving intimation from the bank in his regard or when he receives the bank pass his regard or when he receives the bank pass book duly completed. Thus, the balances of book duly completed. Thus, the balances of both books differ.both books differ.

8. 8. Direct payment made by the bank on behalf Direct payment made by the bank on behalf of customer:of customer: Usually an accountholder Usually an accountholder instructs the bank to made certain payment on instructs the bank to made certain payment on his behalf such as payment for insurance his behalf such as payment for insurance premium, interest on loan, electricity bill etc. premium, interest on loan, electricity bill etc. The bank will debit the party’s account on The bank will debit the party’s account on making the payment and this reduces the bank making the payment and this reduces the bank balance. But the party has no information of balance. But the party has no information of the same till it is informed. Thus, the balance the same till it is informed. Thus, the balance shown in the cash book is more than the shown in the cash book is more than the balance shown by the pass book.balance shown by the pass book.

9. 9. Direct deposit into bank by the debtors:Direct deposit into bank by the debtors: Sometimes, debtors may directly deposit the Sometimes, debtors may directly deposit the amount due in the firm’s bank account. The amount due in the firm’s bank account. The bank credits the firm’s account immediately on bank credits the firm’s account immediately on receipt of such payment but the firm will make receipt of such payment but the firm will make entry in the cash book only after receiving entry in the cash book only after receiving intimation in this regard. Thus, pass book intimation in this regard. Thus, pass book shows more balance than the cash book. shows more balance than the cash book.

10. Other reasons: Sometimes, the firm commits 10. Other reasons: Sometimes, the firm commits an error such as-:an error such as-:

(i) Cheque deposited into the bank omitted to be (i) Cheque deposited into the bank omitted to be recorded in the cash book.recorded in the cash book.

(ii) Cheque issued to a creditor but omitted to be (ii) Cheque issued to a creditor but omitted to be recorded in the cash book.recorded in the cash book.

(iii) Error in totalling or balancing the bank (iii) Error in totalling or balancing the bank column of the cash book. column of the cash book.

NEEDS AND IMPORTANCE O NEEDS AND IMPORTANCE O BANK RECONCILIATION BANK RECONCILIATION

STATEMENTSTATEMENT

The need and importance of bank reconciliation The need and importance of bank reconciliation statement can be judged on the basis of the statement can be judged on the basis of the following facts:following facts:

1) It identifies the reasons for difference between 1) It identifies the reasons for difference between the bank balance as per cash book and the the bank balance as per cash book and the bank balance as per pass book. Necessary bank balance as per pass book. Necessary adjustments or corrections can, therefore, be adjustments or corrections can, therefore, be carried out at the earliest.carried out at the earliest.

2) By preparing bank reconciliation statement, 2) By preparing bank reconciliation statement, the customer becomes sure of the correctness the customer becomes sure of the correctness of the bank balance depicted by the cash book. of the bank balance depicted by the cash book. It helps him in making the further transactions It helps him in making the further transactions with bank.with bank.

3) Periodic preparation of the bank reconciliation 3) Periodic preparation of the bank reconciliation statement reduces the chances of fraud by the statement reduces the chances of fraud by the cash staff. It may be possible that the cashier cash staff. It may be possible that the cashier may not deposit the money in the bank in time may not deposit the money in the bank in time though he might have passed the entry in the though he might have passed the entry in the bank column of the cash book. The bank bank column of the cash book. The bank reconciliation statement will point out to such reconciliation statement will point out to such discrepancies. discrepancies.

4) There is a moral check on the staff of the 4) There is a moral check on the staff of the business organisation to keep the cash records business organisation to keep the cash records always up-to-date.always up-to-date.

UTILITY OF BANK UTILITY OF BANK RECONCILIATION STATEMENTRECONCILIATION STATEMENT

1)1) It gives an authentic proof of the accuracy of It gives an authentic proof of the accuracy of the cash book and pass book balances.the cash book and pass book balances.

2)2) Entries in both the books are automatically Entries in both the books are automatically checked.checked.

3)3) The cash book may be made up-to-date by The cash book may be made up-to-date by recording some either unknown entries.recording some either unknown entries.

4)4) Error, if any, may be rectified.Error, if any, may be rectified.

MAIN POINTS REGARDING MAIN POINTS REGARDING BANK RECONCILIATION BANK RECONCILIATION

STATEMENTSTATEMENT

1)1) Bank reconciliation statement is prepared by Bank reconciliation statement is prepared by the customer.the customer.

2)2) Bank reconciliation statement may be Bank reconciliation statement may be prepared at any time.prepared at any time.

3)3) Bank reconciliation statement is prepared by Bank reconciliation statement is prepared by taking the balance of cash book or pass book taking the balance of cash book or pass book and at the end, the balance of pass bookmor and at the end, the balance of pass bookmor cash book is calculated.cash book is calculated.

Difference between Cash book & Difference between Cash book & Pass bookPass book

Cash bookCash book Pass bookPass book

(i) Given Balance(i) Given Balance Put, favourable Put, favourable balance in plus balance in plus column & column & unfavourable bal. in unfavourable bal. in minus column.minus column.

Put, favourable Put, favourable balance in plus balance in plus column & column & unfavourable balance unfavourable balance in minus column.in minus column.

(ii) See effects of (ii) See effects of transaction on transaction on finding out balance finding out balance i.e. pass book or i.e. pass book or cash book.cash book.

i) Increase in i) Increase in passbook bal. passbook bal. means amount of means amount of difference put in difference put in plus column. plus column.

i)Increase in cash i)Increase in cash book bal. means book bal. means amount of difference amount of difference put in plus column.put in plus column.

ii) Decrease in pass ii) Decrease in pass book balance means book balance means amount of difference amount of difference put in minus put in minus column. column.

ii) Decrease in cash ii) Decrease in cash book balance means book balance means amount of difference amount of difference put in minus put in minus column.column.

iii) Finding out iii) Finding out balance.balance.

Pass book:Pass book:

a) Plus bal. a) Plus bal. shows favourable shows favourable bal. i.e credit bal.bal. i.e credit bal.

Cash book:Cash book:

a) Plus bal. a) Plus bal. shows favourble shows favourble bal. i.e debit bal.bal. i.e debit bal.

b) Minus bal. b) Minus bal. shows shows unfavourable bal. unfavourable bal. i.e debit bal. or i.e debit bal. or overdraft.overdraft.

b) Miuns bal. b) Miuns bal. shows shows unfavourable bal. unfavourable bal. i.e credit bal. or i.e credit bal. or overdraft.overdraft.